United States Bankruptcy Court Central District of California San Fernando Valley Judge Victoria Kaufman, Presiding Courtroom 301 Calendar Monday, February 11, 2019 Hearing Room 301 2:00 PM 1:19-10051 Rockin Artwork, LLC Chapter 11 #1.00 Hendrix creditors' motion for order appointing chapter 11 trustee pursuant to Bankruptcy Code section 1104(a) or converting debtor's case to chapter 7 pursuant to Bankruptcy Code section 1112 Docket 9 Tentative Ruling: For the reasons discussed below, the Court will order the appointment of a chapter 11 trustee. I. BACKGROUND On January 9, 2019, Rockin Artwork, LLC ("Rockin") filed a voluntary chapter 11 petition, initiating case 1:19-bk-10051-VK. That day, Purple Haze Properties, LLC ("PH Properties," and together with Rockin, "Entity Debtors") also filed a voluntary chapter 11 petition, initiating case 1:19-bk-10052-VK. On January 11, 2019, Andrew Marc Pitsicalis (together with Entity Debtors, "Debtors") filed a voluntary chapter 11 petition, initiating case 1:19-bk-10062-VK. On January 18, 2019, the Court entered an order approving of joint administration of Entity Debtors’ cases [1:19-bk-10051-VK, doc. 18]. According to Mr. Pitsicalis, Mr. Pitsicalis and Leon Hendrix ("Leon") own Entity Debtors [Declaration of Andrew Pitsicalis ("Pitsicalis Decl."), ¶ 6]. Mr. Pitsicalis is the managing member, chief executive officer and sole employee of Entity Debtors, and Leon is a member of the board of directors. Id. Entity Debtors allegedly hold licensing, ownership and other rights to certain intellectual property rights related to deceased rock artist Jimi Hendrix and his brother, Leon. Id. A. The Washington Action and California Action In March 2009, Experience Hendrix, LLC and Authentic Hendrix, LLC (together, "Movants") filed suit against Mr. Pitsicalis, among others, in the United States District Court for the Western District of Washington for federal trademark infringement, 2/11/2019 11:13:41 AM Page 1 of 16 United States Bankruptcy Court Central District of California San Fernando Valley Judge Victoria Kaufman, Presiding Courtroom 301 Calendar Monday, February 11, 2019 Hearing Room 301 2:00 PM CONT... Rockin Artwork, LLC Chapter 11 false designation of origin/federal unfair competition, violation of the Washington consumer protection act, contributory infringement and unjust enrichment (the "Washington Action") [Declaration of Jason Strabo "Strabo Decl.," Exh. 1; Pitsicalis Decl., ¶ 14]. On July 24, 2015, Mr. Pitsicalis and Movants entered into a settlement agreement and stipulated judgment (the "Agreement"). Strabo Decl., Exh. 1. Under the Agreement, Mr. Pitsicalis agreed to pay Movants $500,000.00 in installments. Id. Mr. Pitsicalis defaulted on required installment payments under the Agreement, which lead to default being entered in the Washington Action on August 24, 2017, in the amount of $482,500.00 (the "Judgment"). Id. On September 28, 2017, Movants registered the Judgment with the United States District Court for the Central District of California (the "California Action"). Id. On March 19, 2018, Movants filed an application for a charging order for the membership interest of Mr. Pitsicalis in Entity Debtors and the appointment of a receiver. Id. On April 23, 2018, the district court entered an order granting that application and appointed a receiver (the "Charging Order"). Id. In the Charging Order, the district court noted, in relevant part: [Movants] have submitted evidence to the Court showing that Judgment Debtors [FN1] have used Rockin Artwork and Purple Haze Properties (in conjunction with other corporate entities) to make financial transactions on the Judgment Debtor’s [sic] behalf. For example, in November 2016, while defaulting on his settlement payments, Pitsicalis transferred title to a house that he owned in Las Vegas (the "Las Vegas Home") to Rockin Artwork for $1. Pitsicalis, as the controlling member of Rockin Artwork, then took out a loan on the Las Vegas Home and used that money as a down payment to purchase a $2.8 million home in Lake Sherwood, California (the "Lake Sherwood Home"). The Lake Sherwood Home is being used by Pitsicalis and his family. Pitsicalis also stopped using his personal checking account after he depleted it of funds. Instead of using his personal funds, Pitsicalis uses Purple Haze Properties and Rockin Artwork to pay for the Lake Sherwood Home’s 2/11/2019 11:13:41 AM Page 2 of 16 United States Bankruptcy Court Central District of California San Fernando Valley Judge Victoria Kaufman, Presiding Courtroom 301 Calendar Monday, February 11, 2019 Hearing Room 301 2:00 PM CONT... Rockin Artwork, LLC Chapter 11 mortgage and many of Pitsicalis’s living expenses. [Pitsicalis] has also made numerous transfers between these entities and with other companies that he controls. Furthermore, Pitsicalis has failed to file tax returns for himself and his companies, obscuring the existence of records that would reflect his income and the assets under his control ("I have not filed federal, state, or local taxes for any of my companies or for me personally for the past five years."). Pitsicalis used various corporate entities to pay for multi-million dollar properties and continues to use these entities for other personal expenses. Pitsicalis has also failed to pay taxes for himself or the companies he controls, failed to maintain corporate records, and has failed to notify the Court of newly-created corporate entities. The record also shows that Pitsicalis frequently transfers money back and forth between his various companies, and continues to form new entities. This record indicates that there is a probability of fraudulent conduct, a danger that Pitsicalis’s assets are in imminent danger of being concealed, and that the legal remedies attempted thus far have been inadequate. Given this record,…the Court finds that appointment of a receiver is appropriate. Charging Order, pp. 1-11. In the California Action, the district court appointed a receiver. "The receiver was to (1) have full access to the business records of the Charged Entities [FN2]; (2) review and approval all expenditures by the Charged Entities; (3) make any necessary inquiries to ensure Movants are paid; and (4) demand, collect, receive and distribute to Movants all distributions by the Charged Entities that would otherwise be paid to Mr. Pitsicalis." Strabo Decl., Exh. 2 (emphasis in original). In the California Action, on January 3, 2019, the district court entered an order holding Mr. Pitsicalis in civil contempt for violating the Charging Order (the 2/11/2019 11:13:41 AM Page 3 of 16 United States Bankruptcy Court Central District of California San Fernando Valley Judge Victoria Kaufman, Presiding Courtroom 301 Calendar Monday, February 11, 2019 Hearing Room 301 2:00 PM CONT... Rockin Artwork, LLC Chapter 11 "Contempt Order"). Strabo Decl., Exh. 3. The court found that Mr. Pitsicalis violated the Charging Order by: "(1) failing to secure approval from the appointed Receiver … for all expenditures by charged entities [Purple Haze Properties, LLC] and [Rockin Artwork, LLC] as required by the [Charging Order]; failing to provide to [Movants] distributions to which [Movants] were entitled; and failing to deliver to the Receiver all books, records, and other reports to which the Receiver is entitled under the terms of the Charging Order." Id. Pursuant to the Contempt Order, in addition to being held in civil contempt, Mr. Pitsicalis was to, among other things, transfer financial control over Entity Debtors to the apppointed receiver, deliver to Movants all funds disbursed from or expended by either Entity Debtor that were not approved, either expressly or retroactively, by the receiver and to pay Movants’ reasonable fees and costs. Id. Six days after the Contempt Order was entered, Entity Debtors filed their bankruptcy petitions; eight days after the Contempt Order was entered, Mr. Pitsicalis filed his bankruptcy petition. B. The New York Action In March 2017, Movants filed suit against Debtors, among others, in the United States District Court for the Southern District of New York (the "New York Action"). Pitsicalis Decl., ¶ 15. Movants alleged that Debtors were improperly exploiting the intellectual property rights of Jimi Hendrix. During the pendency of the New York Action, Movants brought a motion to sanction Debtors, among others, for spoliation of evidence and discovery abuses (the "Motion for Sanctions"). Strabo Decl., Exh. 9. On October 26, 2018, the court held an evidentiary hearing on the Motion for Sanctions. Id. Mr. Pitisicals testified at that hearing. Id. On November 27, 2018, the court entered an opinion and order granting the Motion for Sanctions. Id. The court granted Movants’ request for an adverse inference instruction at trial and directed Debtors, among others, to pay $77,633.87 for fees and costs incurred by Movants in bringing the Motion for Sanctions. Id. The court in the New York Action found that Debtors repeatedly and intentionally breached their duty to assure the preservation and production of records by: (1) the use of cleaning software on covered computing devices, including on Mr. Pitsicalis’ computer; (2) the failure to disclose the existence of a seventh computing device in 2/11/2019 11:13:41 AM Page 4 of 16 United States Bankruptcy Court Central District of California San Fernando Valley Judge Victoria Kaufman, Presiding Courtroom 301 Calendar Monday, February 11, 2019 Hearing Room 301 2:00 PM CONT... Rockin Artwork, LLC Chapter 11 Pitsicalis’ office containing potentially relevant documents that was supposedly taken to Florida before it could be reviewed; and (3) the deletion of more than 500 relevant test messages, including nine that explicitly used the term "Jimi." In the New York Action, on December 12, 2018, the court issued an order setting an evidentiary hearing for the week of January 7, 2019; Mr. Pitsicalis was to testify at that hearing. Strabo Decl., Exh. 10. During the New York Action, Mr.